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    The Cost of Compliance to Sarbanes-Oxley: An Examination of...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
    The Cost of Compliance to Sarbanes-Oxley: An Examination of the Real Estate Investment Industry.
    Practical Implications:

    The results suggest that viewing the impact of SOX as occurring only once, ignoring either the costs due to the independence requirements or the later impact of Section 404 internal control provisions, and failure to control adequately for business complexity, may have resulted in the prior studies underestimating the effect of SOX on audit and audit related fees.


    Shaw, W. H., and W. D. Terando. 2014. The Cost of Compliance to Sarbanes-Oxley: An Examination of the Real Estate Investment Industry. Auditing: A Journal of Practice & Theory 33 (1): 177-186.

    audit pricing, Sarbanes-Oxley
    Purpose of the Study:

    The purpose of this paper is to document the extent to which Sarbanes-Oxley (SOX) impacted the costs of audits. The authors conduct a within-industry test of the effect of the SOX enactment on audit pricing in one industry, real estate investment firms (REITs). This industry was selected because of its simple business and industry structure. To retain their favorable tax structure, REITs are required to operate only domestically and in only one business segment, remain 70 percent invested in domestic real estate or real estate mortgages, and pay out 90 percent of earnings each year to investors. As a result, all REITs are classified within one four-digit SIC code. This transparent business structure eliminates the need for the inclusion of complexity variables for foreign operations and business segments. The lack of business complexity in the REIT industry would suggest that the primary determination of audit fees within the industry would be firm size. The lower inherent risk of the REIT industry is supported by the fact that level of audit fees paid by the average REIT prior to Sarbanes-Oxley was equal to that paid by an industrial firm one-seventh its size. 

    Design/Method/ Approach:

    The authors obtained a list of all publicly traded REITs from the National Association of Real Estate Investment Trusts, and from Compustat total assets, long-term debt, and cash from operations for the years 2001-2005. They compiled a final sample of 130 firms with complete data from 2001 through 2015.  Nineteen of the 112 firms were listed on the American Stock Exchange, four on NASDAQ and 89 on the New York Stock Exchange.

    • The authors find support for their concern that dummy variables in prior studies do not adequately capture business complexities.
    • The authors show that the REIT industry actually incurred an 88 percent increase in audit and audit-related fees during the SOX implementation period after controlling for other audit and client characteristics, as compared to 74 percent in the Ghosh and Pawlewicz (2009) study.
    • They also show that ignoring intra-industry variations in audit pricing would have led to a conclusion that the increase due to SOX for REITs was 97 percent.
    • The authors find that by assuming that the increase in audit fees due to SOX occurred only in 2002, and not also in 2004 when the internal control provisions became effective, understates the estimation of the effects of SOX on audit pricing.
    • The authors find that the enactment of Titles 200 and 300, which was meant to enhance auditor independence, resulted in a 52 percent increase in audit fees for REITs, while Section 404, which required internal control testing, led to a 145 percent increase.
    Client Acceptance and Continuance, Standard Setting
    Audit Fee Decisions, Impact of SOX